Rob Griffin: How to save money and protect yourself from the taxman

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The Independent Online

Every penny we earned during the first five months of this year effectively went to pay government levies – but millions of people in Britain could have saved a fortune by some completely legal, tax-planning techniques.

The Treasury expects to rake in £589bn in the current tax year with income tax (£158bn) and national insurance (£101bn) among the most lucrative.

But tax experts and independent financial advisers insist many people are paying far too much tax., the professional advice website, estimates that £148m alone will have gone out in unnecessary capital gains tax payments.

Such figures illustrate how much there is to do when it comes to protecting our income and assets, according to Karen Barrett, the site's chief executive.

"Tax-efficient strategies can make a huge difference," she says. "It's important people think about how they can make the most of their allowances as well as reducing their liability."

check your tax code and claim what you are due

Make sure you are on the right tax code and contact your local Citizens Advice Bureau to see if you are getting all the benefits to which you are entitled.

income tax

Husbands and wives (as well as civil partners) are taxed independently so each have their own personal allowances and subsequent bands. Therefore, if one partner has a different tax rate to the other it's worth considering moving assets to the lower taxpayer to reduce the overall burden, points out Geoff Penrice, an independent financial adviser with Honister Partners.

He cites the example of a couple, one of whom is a non-taxpayer and the other who pays the higher rate.

"If they have £100,000 on deposit paying three per cent interest – £3,000 a year – it would be subject to 40 per cent tax in the higher taxpayer's name, which would be £1,200," he says. "If it was transferred to the non-taxpaying partner, this would reduce to zero."

capital gains tax

You can realise up to £10,600 of gains this tax year without having to pay capital gains tax. So if, for example, you have an investment portfolio containing gains of more than that amount, consider selling some to strip out gains within this year's allowance, says Justin Modray, founder of website Candid Money.

"Doing so could reduce the amount of tax, if any, you end up paying in future," he says. "If you wish to repurchase the same investments, you'll have to wait 30 days, but you can purchase other investments straight away."

If you're married or in a civil partnership, don't forget to use your partner's allowance, too, says Mr Modray, as you can transfer assets to them free of tax, which they can then sell to realise a gain within their allowance.

"Anyone that has realised a loss, either this year or previously, can offset it against any gains," he adds. "Unused losses can be carried forward indefinitely, but you must inform HMRC of the loss within five years from the 31 January after the tax year in which the loss occurred."

individual savings accounts (iSAs)

These should be a priority because they are the simplest way to make money without sharing any with the Treasury.

Cash ISAs are basically tax-free savings accounts on which interest is paid. Stocks & shares ISAs, meanwhile, invest in assets such as open-ended investment companies and investment trusts.

It is important to make sure you use your ISA allowance wherever possible, advises Patrick Connolly, head of communications at AWD Chase de Vere.

"You can currently invest up to £5,340 each year into a cash ISA and this will mean that all interest is tax-free and it doesn't need to be declared on your tax return," he says. "You should also look at using your stocks and shares ISA allowance into which you can invest up to £10,680 each year (although this includes whatever you invest into a cash ISA).

pension benefits

Pension contributions benefit from income tax relief – a £100 contribution costs a 20 per cent taxpayer £80; a 40 per cent taxpayer £60 and a 50 per cent taxpayer £50 – which makes them particularly attractive, according to Justin Modray at Candid Money.

"If you belong to a company pension scheme then contributions are usually made directly from your pay before tax, so you enjoy the full benefit straight away," he says.

"Otherwise, basic-rate tax relief is given automatically at source while higher-rate taxpayers can deduct the additional, higher-rate tax from their tax bill. You can invest up to your annual earnings, subject to a limit of £50,000."

It can be even more tax efficient to make pension contributions through your employer using salary sacrifice, according to Patrick Connolly at AWD Chase de Vere.

"This is a contractual arrangement where you give up part of your cash remuneration and in return receive an equivalent value of non-cash benefits," he explains. "Pension contributions through salary sacrifice benefit from tax relief at source on contributions, no national insurance payments on contributions and the possibility your employer may boost the contribution by adding part or all of their national insurance saving."

inheritance tax (IHT)

Your first task should be to write a will and work out exactly what assets you will leave behind. This can include everything so factor in threats such as the cost of long-term care.

When you have a total figure, compare it to the value of your assets to provide an estimate of what you may end up leaving to friends and family.

If it's over £325,000 – the current threshold – think about getting your assets out of the Treasury's reach.

There are plenty of allowances around IHT that are not being utilised, points out Geoff Penrice at Honister Partners, including a £3,000 annual gift allowance and gifts out of income. In addition, there are some very useful trust options for tax planning purposes.

"I like 'Discounted Gift Trust', which allows someone to gift capital into a trust – the capital falls out of their estate after seven years – but enables them to still receive an income for life," he says.


There are also Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) – but these aren't for everybody, warns Mr Connolly.

"Investors get a range of benefits – including 30 per cent initial income tax relief – but they are usually risky investments so there is a danger you could lose more than you gain," he says.

Enterprise Investment Schemes, says Mr Modray, "are similar to VCTs in that your money must be invested in very small companies, but arguably even higher risk as your money is invested in the shares of single companies rather than a fund.

"An income tax rebate of 20 per cent is given on investments of up to £500,000, provided the shares are held for at least three years."

Higher-rate taxpayers who would rather give money to charity than the taxman should consider making a donation, adds Mr Modray.

"When you make a donation through the Gift Aid scheme the charity can reclaim basic rate tax," he explains. "For every £100 donated a higher rate taxpayer can reclaim £25."